The Prophet Motive

Meredith Whitney is the most controversial financial analyst in America, a woman who beats the big boys by making more aggressive predictions than they do. But has her crystal ball finally cracked?

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Meredith Whitney
Photograph by Anna Bauer

By

Duff McDonald

September 29, 2011

Meredith Whitney is a troublemaker. Even though she is speaking barely above a whisper, over breakfast at New York's Core Club, her words have sharp edges. "Bankers complaining about new regulations and higher capital requirements remind me of melodramatic soccer players," she says. "You know, the ones that get barely brushed and they're on the ground rolling around and moaning? There are plenty of countries that have higher capital standards than the U.S., and they deal with it. We're supposed to be dealing with the smartest minds out there, and they can't adjust to a different environment?"

She's not finished. Her breakfast of tea, egg whites, salsa and a side of bacon is getting cold.

"It's a reflection of the fact that over the last 20 years it's been so easy to make money off the mortgage industry that they can't figure out how to rationalize their businesses," she continues. "Rules change. Deal with it. This is what companies do time in and time out. Bankers are embarrassing themselves with all this moaning. This may get me into trouble, but they could learn something from the rest of corporate America."

The rest of the analyst community could learn a thing or two from Meredith Whitney about how to grab a microphone and not let go. She has been holding on to it since October 31, 2007, when she was an analyst at Oppenheimer & Co. and made what has become famous as The Call, the pronouncement that foretold the Great Recession. It came in the form of a critical research report on Citigroup that hit the financial world like a concussion grenade. Suddenly, she had everyone's attention, and she focused that attention on the issue that would soon shake the whole world: In the frenzy of the housing boom, Wall Street had taken on risks it no longer understood—or even knew it was taking—and a reckoning was coming. Soon.

She put the report out on a Wednesday. By the following Monday, Citigroup's CEO, Chuck Prince, was out of a job. The accolades came rolling in. Superstar financial writer Michael Lewis called her "a woman who moves markets" and "the closest thing Wall Street has to an oracle." Fortune referred to her as the woman who "called Wall Street's meltdown." And suddenly, Whitney's every utterance could move the markets.

"What's especially interesting about her is that she combines deep research with supercrisp verbal communication ability," says Molly Ashby, CEO and founding chairman of private-equity and venture-capital-investment firm Solera Capital LLC. "She's lovely to look at, and is engaging and funny and fun—she could be on TV all day long—but she backs it all up with very specific research." Research, it should be pointed out, that has fans in some very high places. "Her work on mortgages has always been exceptional," says Jamie Dimon, chairman and CEO of JPMorgan Chase.

It was natural, then, that a year and a half after the Citigroup report, tension arose between Whitney and her employer, Oppenheimer & Co. Wall Street firms provide the platform, the clients and the resources for analysts to do their work. In return, though, they keep most of the money. (It's not that analysts are underpaid. The best make a few million dollars a year.) But by 2009, Whitney was Wall Street's most prominent analyst, and in February of that year, she decided that she should be the primary beneficiary of all the Meredith madness, and left her job to establish Meredith Whitney Advisory Group LLC.

Which brings us to December 19, 2010, when she made The Call II—this one on "60 Minutes"—in which she predicted a massive wave of debt defaults by cities and states all over the country. "You could see fifty to a hundred sizable defaults, more," she told correspondent Steve Kroft. "This will amount to hundreds of billions of dollars' worth of defaults."

She was playing Nostradamus again, predicting an unprecedented cataclysm across America. "This was such a dirty little secret for so long," she says over a forkful of egg white. "I can't believe in my career that I'm finding, in such a short period of time, the second massive 'dark pool' in the financial system," she continues. "The first was in the banks, and the second is state finances." She had outlined those strained finances in a September 2010 piece entitled "The Tragedy of the Commons," a compendium of the myriad and extensive financial obligations held by the nation's largest 15 states that they were clearly about to begin having trouble meeting. (She expanded that coverage to 25 states in June 2011.)

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WRESTLEMANIA | With husband John Layfield, whom she met during a television appearance on Fox's "Bulls & Bears."
Robyn Twomey/Corbis Outline

Because Whitney was the person yelling "Fire!" in the theater, jittery investors rushed for the exits. Some $14 billion was withdrawn from muni funds between December 22 and February 2. Returns on municipal bonds in the fourth quarter of 2010 fell the most in 16 years.

And so the attacks began.

The one with the most media value came from Alexandra Lebenthal, the daughter and heiress of municipal bond king Jim Lebenthal. The Lebenthal name is synonymous with municipal bonds in New York—the family has been hawking them for three generations—and Lebenthal didn't exactly cotton to some outsider trying to ruin the party. "Her numbers are way off," Lebenthal told Reuters. "She's brilliant when it comes to housing, but I don't think she has the same expertise or credentials when it comes to munis."

"There would need to be a billion dollars in defaults every day to get to that projection by December 19," says Lebenthal, almost gleefully, when I ask her if she's changed her opinion of Whitney's call. She has not. "If she had come out and focused on states' budget and pension issues, she wouldn't have been alone. She took a wrong turn by positioning herself as the only one who was willing to touch the third rail of municipal debt."

The New York Observer followed with a vicious attack on Whitney ("Battle of the Bond Girls"), in which writer Maureen Tkacik took the somewhat surprising position that Lebenthal's New York society credentials, municipal market pedigree and inherited prominence somehow trumped Whitney's singularly earned reputation as an astute financial analyst willing to make unpopular calls. Dripping with sarcasm, the piece concluded that Whitney was "disappointingly superficial." In one sense, that conclusion is absolutely, utterly incorrect. Whitney's research isn't—and never has been—superficial. But her remark on "60 Minutes" certainly seemed to be. "Fifty to a hundred" is hardly a precise forecast.

But here's the real problem: The defaults Whitney warned about have so far failed to materialize. As a result, she has spent the better part of this year listening to critics argue that it's time to turn the microphone off, that she tried to recapture the glory of The Call and, like most sequels, it was an embarrassing failure.

Over a drink at the Peninsula Hotel on 55th Street in mid July, she shrugs off the attacks. "I don't back off on anything," she says when offered a chance to do just that. "Time will tell who is right. Look, Wall Street is a true meritocracy. If I'm making my clients money, they're going to stick around. We're doing best-in-class work, and we're getting paid for it. People can say whatever they want, but I don't see any clients leaving." (She won't name any of her clients.)

Meredith Whitney was born on November 20, 1969, in Summit, New Jersey. She came by her interest in finance honestly: Her father, Richard, was a venture capitalist and onetime official in Nixon's Department of Commerce. She attended the Lawrenceville School in New Jersey and graduated from Brown in 1992, where she majored in history. Whitney's sister Wendy says she's not surprised that her sibling ended up a Wall Street influencer. "At Lawrenceville, when everyone was wearing ponytails and Birkenstocks, she was in high heels, a miniskirt and pearls," Wendy recalls. "She was the female Alex P. Keaton."

Whitney joined Oppenheimer in 1993 as an equity research associate covering the oil and gas industry, but switched to covering specialty finance a year later. Three years after that, she moved to Wachovia, where she began covering financial institutions. She left Wachovia in 2002, and because of a noncompete agreement, couldn't immediately take another analyst job. So she became a part-time contributor to Fox News (which, like WSJ. Magazine, is owned by News Corp.) before returning to Oppenheimer in 2004, covering banks and brokers.

She had a Tracy-and-Hepburn first meeting with her future husband, former WWE wrestler John Layfield, when both were appearing on Fox's "Bulls & Bears." Whitney castigated him on-air for recommending financial stocks in a period of rising rates. Their televised sparring sparked a romance, and the two married in February 2005. Layfield was clearly more of a celebrity than she was at the time, but by 2009, the couple had arguably equal-size public profiles, if in very different realms—Layfield revered by teenage boys from coast to coast, and Whitney a rock star of the business pages. (Layfield also has quite the portfolio of businesses under his belt, from financial analyst to purveyor of a drink called MamaJuana Energy, a variation of the traditional Dominican drink made of rum or red wine and tree bark.)

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Layfield at a 2004 WWE Smackdown
John Giamundo/courtesy WWE

Layfield's primary wrestling nom de guerre was JBL, or John "Bradshaw" Layfield, a big-mouthed conservative businessman modeled after J.R. Ewing from "Dallas." His entrances featured the ringing of a bell, like that of the New York Stock Exchange, and his signature "finishing move" was called the Clothesline from Wall Street. Asked about his alter ego now, Layfield laughs. "I was the evil stock market guy," he says in a broad Texas drawl, "which is pretty funny considering who I ended up with."

It wasn't a bad idea to have a 6-foot-6, 290-pound pro wrestler around the house after The Call. Whitney received numerous death threats, and one fanatic even managed to find his way to the couple's unlisted midtown Manhattan apartment. After that, Layfield canceled a trip to Texas to stick around. "She got one threatening email a guy actually sent from his home computer," he recalls. "They tracked him down pretty easily, but I thought to myself, 'If this guy is this stupid, to use his own computer, and somehow blames Meredith and not Chuck Prince for his failure to handle Citi's risk, then he might just be nutty enough to actually hurt her.' I wasn't worried about rational people being angry, but about the Looney Tunes. So I stayed near her for a while."

Layfield endured a number of injuries in his career, including a broken back, and retired once he'd hit his 40s—a time during which his injuries were becoming more frequent and Whitney's worries about the risks became more urgent. "You can say what you want about whether the stories in wrestling are real," Whitney says. "But let me tell you: The injuries are very real."

Layfield now spends summers at the exclusive Mid Ocean Club in the couple's favorite vacation spot, Bermuda. Whitney commutes there on weekends from JFK airport. While Layfield spends most of his waking hours on the golf course—his handicap last year was an impressive plus-two—Whitney usually gets up in the morning and goes for a 10-mile run. She's training for her third marathon this November. In between runs, she's either reading or out playing sports.

Despite being named a member of two "Most Powerful Women" lists—in Fortune and the New York Post—as well as being the host of large gatherings of professional women at both her office and her home, Whitney doesn't spend too much time dwelling on the fact of her success in a male-dominated field. Even when she does get together with female peers, "we don't sit around and talk about the plight of being a woman," she says. "We just get on with it and do things."

She's also reluctant to talk about whether there's a different standard for women and men. "If you don't have the goods," she says, "you won't be successful on Wall Street, no matter if you're male or female." Press her, though, and she will admit that if a woman is going to make a go of it in finance, she's got a harder row to hoe than the average male. "As a woman, you have to say yes to every assignment," she says. "You have to be the first person to raise your hand, every single time."

It's not that she isn't aware of her feminine charms. It's been a long time since Whitney stepped out of the business-lady uniform—the navy blue suit—and started wearing Christian Dior or Armani to the office. Since her riveting Citigroup call, her television persona has evolved from an attractive, but not overly produced woman of finance to a positively striking TV presence. Nowadays, Whitney dresses to the hilt—on the day of one interview, she was wearing a tasteful pink Ferragamo dress, pearls and diamond earrings. "The funny thing is, in your 20s you try and look serious, and after your 20s, you just try and look hot," she has said. "I'm not an old white dude, so I stick out."

In the Meredith Whitney School of Success, though, it really does all come down to hard work. Despite her TV-ready looks, Whitney is a geek, and says that her happiest moments at work are when she's doing straight-up research. "It's my favorite thing," she says. "I told David Viniar, the chief financial officer of Goldman Sachs, that I would prefer to have lunch at my desk than go out. He agreed with me."

"What I admire about Meredith is that she has built her career on doing the hard work and then on speaking authentically," says Facebook COO Sheryl Sandberg. "She focuses on the substance first and foremost and then speaks her truth."

So here we are, four years after The Call. The list of Whitney fans may have stopped growing, while the list of her critics is expanding by the day. Her impressive batting average hasn't stopped a murderer's row of critics from stepping up to the plate to take swings at her after her "60 Minutes" interview. California Treasurer Bill Lockyer called her remarks "apocalyptic arm-waving." Christopher Hoene, research director of the National League of Cities, cited a "stunning lack of understanding." Richard Larkin, senior vice president and director of credit analysis at Herbert J. Sims & Co., wrote that she was "dead wrong" and "out of [her] league."

Kate Marshall, Treasurer of Nevada, decided to take Whitney head-on. In an interview with CNBC, she suggested Whitney had made basic errors in some of her calculations. Whitney claims Nevada's debt service eats up half its annual budget. Marshall says it accounts for just 8.6 percent. When I ask them to contradict Marshall's numbers, Whitney's people say merely that they cannot "attest" to the Nevada Treasurer's data. "I can't speak for Ms. Whitney," says Marshall, "but it would be nice if she did a little homework."

It's important to note, however, that Whitney has some big names on her side of the issue. Professional scaremonger Nouriel Roubini, the man who has been dubbed "Dr. Doom," has also predicted $100 billion in municipal defaults over the next five years. The last time these two were arguing for something that had the rest of the analyst community mocking them, it came to pass. Warren Buffett and George Soros have also warned about a cataclysm in municipal finances.

"If I'm such a ding-dong, why the effort?" fires back Whitney, when informed that Herbert J. Sims's Larkin has devoted an entire report to rebutting her. She insists that the only people attacking her analysis are those with a vested interest in keeping the muni machine well oiled. "It's such a greasy business," she says about the municipal debt market. "Am I wrecking that party?" she asks in a mocking tone. "How dare I!"

Here's the interesting thing: Despite the raging controversy, not many people have actually read "The Tragedy of the Commons." From the day she set up her own shop, Whitney has assiduously protected her research, and rarely shares it with anyone outside her client base. That includes the media, which made her a star, and toward which she has an increasingly wary perspective.

Whitney charges $100,000 for a base-level subscription to her research, and says she's not going to dilute the value provided by giving it away to anyone who asks for it. "When I started this business, we very clearly didn't provide research to people who weren't clients," she says. "I've never compromised on price because that's not fair to our existing clients. So my oldest client is my favorite client, and I'm not ever going to treat a new client better than I would treat an old client." (She's not kidding. "We won't pay her ridiculous fee of $100,000 just to get her research," says a senior executive at a Wall Street bank. "But even when she comes out with a piece of research on us, she won't give it to us. It's infuriating.")

The irony of it all is that "Tragedy" is a nuanced piece of research about the fiscal challenges facing states in this country, and the possibility of both corporate—and human—migration as a result. To those who say she's a knee-jerk pessimist, Whitney takes pains to point out that she's bullish—very bullish—on those states that aren't sinking under a financial morass. "Look at the Midwest," she says. "The U.S. is going to look a lot different over the next 20 years than it did during the last 20 years, and you're going to see agribusiness become a much bigger deal. Most of the states in the middle part of the country have clean balance sheets. They don't have to cut services and they don't have to raise taxes. I'm talking about Kansas and North Dakota."

That said, there wasn't a single precise call for a debt default in the piece—on page 42, she even writes, "We are not calling for any specific defaults within the scope of this report." So why did she make a remark on "60 Minutes" that doesn't appear in her report, an incendiary comment that has put her credibility at risk?

The first answer is that she meant it. That's her position, and she's sticking to it.

The second, provided by critics, is that she has an application in to the federal government to launch a bond-rating agency, and that panic in the municipal markets might gin up demand for such services. She did have a meeting in November 2010 with SEC chairman Mary Schapiro on this very subject. So this isn't necessarily a big stretch. Whitney says the chaos surrounding Standard & Poor's downgrade of the U.S. shows clearly that more competition is needed in the ratings area. "They were trying to do the right thing, but got absolutely butchered because their ratings are inconvenient to people," she says. "But one rating agency's opinion would certainly have less of an impact if there were more participants in the marketplace. I think what happened in the aftermath of the call should drive that point home to the regulators."

The third is that she's hunting for new clients, and may have concluded that a little controversy might just help draw a few in. She says that the "Tragedy" report has done just that, but won't name names.

The fourth? She was craving the high that comes from moving markets, and decided to go big. She doesn't, her critics argue, want to be another Elaine Garzarelli, the Shearson Lehman analyst who rocketed to fame after predicting the 1987 crash, went on to found her own company but was never heard from again. So she tried for another big call, and it's not working out so far. The counterargument to this would be that Whitney still does move markets when she makes a big bank call, as she did when she blew a kiss to Bank of America on August 24, saying it wasn't in dire need of capital. The stock jumped nearly 9 percent as a result. So it's not as if she can't get that high if she really wants it.

Whatever the right answer, it certainly hasn't silenced her. When I ask her what she thinks of the whole S&P downgrade in August, and what it means for her muni call or even just the markets in general, she doesn't hold back. "It doesn't have a direct impact on my call, but what it should do is focus people even more on the continuation of fiscal woes in this country. States had made their 'balanced' budgets by gimmicking their revenue numbers and now some of those numbers aren't coming in, so they have to cut social services even more. Who are you going to choose to support—your constituents or your bondholders? But the downgrade is going to have ramifications far beyond that. It certainly affected consumer confidence. Not only that, most Americans don't think their politicians handled the situation very well."

When I ask her what she would like her epitaph to say, she thinks for a minute and then says, "She was really good. She worked hard, and she was right. Man, she was right, and for a long time." But when the conversation turns back to the municipal debt market, she slips back into hardball mode. "This is controversial to people? That our states and cities are possibly going to default? Are you f–ing kidding me?"

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